POST-NEGOTIATION - Key Points to Consider When Implementing a Structured Settlement
Armed with illustrative proposals, future care valuations and (possibly) a structure broker on-site to run numbers throughout the day, you've ended a marathon mediation with a settlement your client is pleased with, and part of that settlement will be structured. Your
work here is done, right? Not necessarily.
Like any marathon, as good as the preparation is, the race isn't won without the proper finish. When a structured settlement is to be implemented, some items must be dealt with at the time of settlement in order to ensure that the structure component can be effected
without any last minute confusion. Here are the key points to remember:
1. Is There a Right to Structure?
The cardinal rule of the structured settlement is that it requires the consent of the casualty insurer providing the funds. Be clear on this. Talk of structuring at the beginning of the day does not necessarily confirm the right to structure at the end of the day. Ideally, the settlement agreement should specifically say that the plaintiff has the right "to structure all or any portion of the settlement funds".
2. Who Will Own the Structured Settlement?
The plaintiff cannot own the structured settlement. In order to maintain the tax-free status of the payments, the structure must be owned by an insurer. If the casualty insurer contributing the settlement funds has agreed to own the structured settlement, this must be spelled out in the settlement agreement or Minutes of Settlement. The fact that a casualty insurer has consented to a structure, does not necessarily mean that the insurer has agreed to own it. This must be clarified at the time of settlement. Some casualty insurers will allow structured settlements, but their corporate policy is to assign ownership. Assignment is the process by which the casualty insurer's obligation to make periodic payments to the plaintiff, is transferred to an independent, third party insurer. Assignment is not a vehicle by which the plaintiff can unilaterally establish a structure without the consent of the contributing insurer. Consent of the defence is required, even with assignment, since appropriate documentation must be executed by representatives of the plaintiff and the assigning casualty insurer, in order to effect the assignment. This documentation is prepared by the structure broker. Counsel representing casualty insurers need to be clear on whether their client will own the structure directly, or whether assignment will be required. If assignment is required, it must be clearly stated, since any ambiguity might lead to a protracted resolution of the claim. Both plaintiff and defence counsel should be aware that the requirement for assignment restricts brokerage options and may result in lower payments based on a specific funding amount, or a higher cost to produce agreed-upon payments.
3. What if There are Multiple Contributors?
If more than one insurer is contributing to the settlement, a number of ownership possibilities arise:
One insurer might own the structured settlement completely
Each insurer might own the structured settlement in direct proportion to its
contribution to the total settlement
One insurer might assign the structure on behalf of all contributors
Each insurer might assign ownership in proportion to its contribution
One insurer might own its portion, the other(s) might assign its/their portion
No matter what the agreement is, it needs to be clarified. The structure broker cannot proceed unless the issue of ownership is addressed.
4. If Assignment is Required, Who Pays the Fee?
The simple answer is "whoever wins the argument". There is a cost to assignment. A fee of $2,000 is charged by each third party insurer (assignee) stepping in to own the structure on behalf of the contributing casualty insurer.
The assignment fee is not charged by the structure broker. Sometimes, the most favourable quotation is obtained by splitting the structure funding between more than one life insurer. When structure funding is split, two (and occasionally, three) third party insurers are required to step in to assume the payment obligation. The result is a requirement for two assignment fees, totalling $4,000.
It is important to appreciate that, depending on how the settlement is constituted, the plaintiff or defence position is ultimately enhanced by virtue of the split brokerage, notwithstanding the requirement for an extra assignment fee (or fees).
The fact that a casualty insurer requires assignment does not necessarily mean that the insurer will pay the costs of assignment. This is often the subject of a great deal of negotiation, and must be clarified at the time of settlement. Even seven figure settlements have ground to a halt over the payment of a $2,000 or $4,000 assignment cost.
For this reason, the settlement agreement should state whether the plaintiff or the casualty insurer will pay the cost of assignment, or whether the cost will be shared between the parties. All parties should be aware that, depending on the structure option chosen, the file might require the payment of more than one fee.
5. Is There a Reversionary Interest?
It must be made clear at the time of settlement whether or not there is to be a reversionary interest. A "reversion" is the designation of the casualty insurer - not the injured person's estate or designated beneficiary - as the recipient of payments in the event the injured person dies within a specified guarantee period. It is very common for casualty insurers to seek reversionary interests in SABs settlements. In order to secure a reversionary interest for the casualty insurer, a guarantee period must be included in the structured settlement. Without a guarantee, payments will simply stop when the plaintiff dies (whether one payment or one hundred payments have been made), and there will be no money to "revert" to the casualty insurer. In our experience, the insurer generally pays the cost of the guarantee, over and about the agreed upon settlement amount. However, to avoid future dispute, this too must be clearly outlined at the time of settlement.
In addition to identifying that the casualty insurer is retaining a reversionary interest, the settlement agreement should also outline whether the reversion is complete (i.e. 100%) or partial (say, 50/50). A 100% reversion means that all guaranteed payments falling due
after the injured person's death revert to the casualty insurer. In the case of a 50% reversion, 50% of the guaranteed payments would go to the casualty insurer and 50% to the claimant's estate or designated beneficiary. In such a case, the cost of the guarantee could likely also be shared 50/50. Reversions may also be applied on the basis of time periods. The casualty insurer may take a reversion for, say, the first 15 years after structure payments begin, and the injured party might include a 5-year guarantee (from year 16 to year 20) for the benefit of his or her estate. Presumably, the latter segment of guarantee would be paid for by the claimant.
With any form of reversionary interest, a minimum amount to be structured must be identified, and the casualty insurer should secure the right to approve the final form of structured settlement. Without a minimum funding amount specified, there is no obligation to fund a structure at all. Without a requirement that the casualty insurer approve the final form of structure, a claimant might (even against his or her counsel's advice) be inclined to take payments over a very short period of time, during which there is only a slight probability of death. In that situation, the value of the reversion to the casualty insurer is greatly diminished.
6. What Else Am I Forgetting?
Only a few small items remain, in order to ensure the smooth implementation of the structured settlement.
Ideally, the settlement agreement should identify the name of the structure firm that will be implementing the structure. Whether you represent the casualty insurer or the injured party, it is in your client's best interests to ensure that the structure is brokered by experts in the field. In addition, the structure broker will review your draft and final settlement documents in order to ensure that the tax-free status of the structured settlement is preserved and that the interests of all parties are protected.
Finally, it is wise to outline a time frame for funding the structure, in order to avoid undue delay in finalizing the settlement of the claim. This is especially important if much needed SABs payments are stopped at the time of settlement.
work here is done, right? Not necessarily.
Like any marathon, as good as the preparation is, the race isn't won without the proper finish. When a structured settlement is to be implemented, some items must be dealt with at the time of settlement in order to ensure that the structure component can be effected
without any last minute confusion. Here are the key points to remember:
1. Is There a Right to Structure?
The cardinal rule of the structured settlement is that it requires the consent of the casualty insurer providing the funds. Be clear on this. Talk of structuring at the beginning of the day does not necessarily confirm the right to structure at the end of the day. Ideally, the settlement agreement should specifically say that the plaintiff has the right "to structure all or any portion of the settlement funds".
2. Who Will Own the Structured Settlement?
The plaintiff cannot own the structured settlement. In order to maintain the tax-free status of the payments, the structure must be owned by an insurer. If the casualty insurer contributing the settlement funds has agreed to own the structured settlement, this must be spelled out in the settlement agreement or Minutes of Settlement. The fact that a casualty insurer has consented to a structure, does not necessarily mean that the insurer has agreed to own it. This must be clarified at the time of settlement. Some casualty insurers will allow structured settlements, but their corporate policy is to assign ownership. Assignment is the process by which the casualty insurer's obligation to make periodic payments to the plaintiff, is transferred to an independent, third party insurer. Assignment is not a vehicle by which the plaintiff can unilaterally establish a structure without the consent of the contributing insurer. Consent of the defence is required, even with assignment, since appropriate documentation must be executed by representatives of the plaintiff and the assigning casualty insurer, in order to effect the assignment. This documentation is prepared by the structure broker. Counsel representing casualty insurers need to be clear on whether their client will own the structure directly, or whether assignment will be required. If assignment is required, it must be clearly stated, since any ambiguity might lead to a protracted resolution of the claim. Both plaintiff and defence counsel should be aware that the requirement for assignment restricts brokerage options and may result in lower payments based on a specific funding amount, or a higher cost to produce agreed-upon payments.
3. What if There are Multiple Contributors?
If more than one insurer is contributing to the settlement, a number of ownership possibilities arise:
One insurer might own the structured settlement completely
Each insurer might own the structured settlement in direct proportion to its
contribution to the total settlement
One insurer might assign the structure on behalf of all contributors
Each insurer might assign ownership in proportion to its contribution
One insurer might own its portion, the other(s) might assign its/their portion
No matter what the agreement is, it needs to be clarified. The structure broker cannot proceed unless the issue of ownership is addressed.
4. If Assignment is Required, Who Pays the Fee?
The simple answer is "whoever wins the argument". There is a cost to assignment. A fee of $2,000 is charged by each third party insurer (assignee) stepping in to own the structure on behalf of the contributing casualty insurer.
The assignment fee is not charged by the structure broker. Sometimes, the most favourable quotation is obtained by splitting the structure funding between more than one life insurer. When structure funding is split, two (and occasionally, three) third party insurers are required to step in to assume the payment obligation. The result is a requirement for two assignment fees, totalling $4,000.
It is important to appreciate that, depending on how the settlement is constituted, the plaintiff or defence position is ultimately enhanced by virtue of the split brokerage, notwithstanding the requirement for an extra assignment fee (or fees).
The fact that a casualty insurer requires assignment does not necessarily mean that the insurer will pay the costs of assignment. This is often the subject of a great deal of negotiation, and must be clarified at the time of settlement. Even seven figure settlements have ground to a halt over the payment of a $2,000 or $4,000 assignment cost.
For this reason, the settlement agreement should state whether the plaintiff or the casualty insurer will pay the cost of assignment, or whether the cost will be shared between the parties. All parties should be aware that, depending on the structure option chosen, the file might require the payment of more than one fee.
5. Is There a Reversionary Interest?
It must be made clear at the time of settlement whether or not there is to be a reversionary interest. A "reversion" is the designation of the casualty insurer - not the injured person's estate or designated beneficiary - as the recipient of payments in the event the injured person dies within a specified guarantee period. It is very common for casualty insurers to seek reversionary interests in SABs settlements. In order to secure a reversionary interest for the casualty insurer, a guarantee period must be included in the structured settlement. Without a guarantee, payments will simply stop when the plaintiff dies (whether one payment or one hundred payments have been made), and there will be no money to "revert" to the casualty insurer. In our experience, the insurer generally pays the cost of the guarantee, over and about the agreed upon settlement amount. However, to avoid future dispute, this too must be clearly outlined at the time of settlement.
In addition to identifying that the casualty insurer is retaining a reversionary interest, the settlement agreement should also outline whether the reversion is complete (i.e. 100%) or partial (say, 50/50). A 100% reversion means that all guaranteed payments falling due
after the injured person's death revert to the casualty insurer. In the case of a 50% reversion, 50% of the guaranteed payments would go to the casualty insurer and 50% to the claimant's estate or designated beneficiary. In such a case, the cost of the guarantee could likely also be shared 50/50. Reversions may also be applied on the basis of time periods. The casualty insurer may take a reversion for, say, the first 15 years after structure payments begin, and the injured party might include a 5-year guarantee (from year 16 to year 20) for the benefit of his or her estate. Presumably, the latter segment of guarantee would be paid for by the claimant.
With any form of reversionary interest, a minimum amount to be structured must be identified, and the casualty insurer should secure the right to approve the final form of structured settlement. Without a minimum funding amount specified, there is no obligation to fund a structure at all. Without a requirement that the casualty insurer approve the final form of structure, a claimant might (even against his or her counsel's advice) be inclined to take payments over a very short period of time, during which there is only a slight probability of death. In that situation, the value of the reversion to the casualty insurer is greatly diminished.
6. What Else Am I Forgetting?
Only a few small items remain, in order to ensure the smooth implementation of the structured settlement.
Ideally, the settlement agreement should identify the name of the structure firm that will be implementing the structure. Whether you represent the casualty insurer or the injured party, it is in your client's best interests to ensure that the structure is brokered by experts in the field. In addition, the structure broker will review your draft and final settlement documents in order to ensure that the tax-free status of the structured settlement is preserved and that the interests of all parties are protected.
Finally, it is wise to outline a time frame for funding the structure, in order to avoid undue delay in finalizing the settlement of the claim. This is especially important if much needed SABs payments are stopped at the time of settlement.
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